RTTNews - Economic recovery is continuing to remain anybody's guess. Last week, the IMF expressed hopes of a stronger-than-expected recovery in 2010, with the agency forecasting 2.5% growth in 2010 following a 1.4% contraction in 2009. Reflecting the recovery pangs, the IMF said the recovery is expected to be slow and sluggish and the stabilization will remain uneven. Consumers have to return to their spending ways if we are to see a sustainable recovery in 2010.
Unfortunately, consumers are still wary. The apprehension was clearly evident, as the mid-month reading of the Reuters/University of Michigan's consumer sentiment survey showed a decline in consumer sentiment to 64.6 in July from 70.8 in June. While the current economic conditions index fell by 2.8 points to 70.4, the expectations index moved down 8.3 points to 60.9. The sagging confidence is primarily due to the sad state of affairs in the labor market and their implication for income.
Lending some hopes that stabilization in the job market may be round the corner, weekly jobless claims fell to 565,000 in the week ended July 11th. The numbers could have been exaggerated, as auto plant closures earlier this year had kept claims elevated. Notwithstanding the positive data, Danske Bank is of the view that the overall trend is clearly down.
A rise in gasoline prices only made matters worse. Economists believe that the damage done to consumer confidence cannot be repaired overnight and therefore, it would take more than stray pieces of positive economic evidence to bring about a turnaround in the confidence of consumers.
The G-8 meeting held last week did not result in any concrete action, with the priorities of nations varying from each other. Germany seemed to think that discussion on exit strategies is the need of the hour, while France and the U.K. wanted more actions to kick-start the global economy into top gear.
The Commerce Department's trade balance report showed a deficit of $26 billion in May, down from a downwardly revised deficit of $28.8 billion in April. The improvement came about due to an increase in exports and a reduction in imports. Imports have declined for 10 straight months, accentuating the weakness in domestic consumption. This weakness is expected to linger on, as the savings rate increases. The positive trade balance report bodes well for second quarter GDP, which is most likely to be revised up by at least a few tenths.
The Institute for Supply Management released the results of its sector survey, showing that the non-manufacturing index rose to 47 in June from 44 in May. The index is now at its highest level since September 2008. While the new orders index rose to 48.6 from 44.4 in May, the backlog of orders index climbed 6 points to 54.5. The employment index also climbed, rising 4.4 points to 43.4. On a very positive note, the export orders index rose 7.5 points to 54.5. Meanwhile, the prices paid index rose about 7 points to 53.7, mitigating deflationary fears.
Meanwhile, the Federal Reserve said consumer credit declined by $3.2 billion to $2.519 trillion, with the decline much smaller than the $5.6 billion drop expected by economists. The bulk of the decline was in revolving credit, which declined by $2.9 billion, while non-revolving credit declined by a more modest $400 million.
After a week of relative calm, we move into another week with a flurry of reports that are likely to be scoured and sifted by traders, as they attempt to chart the economy's course. The Commerce Department's retail sales report for June, the results of the June manufacturing surveys of the New York Federal Reserve and the Philadelphia Federal Reserve, the Federal Reserve's industrial production report for June and the Commerce Department's housing starts report for June are likely to be in the radar.
Traders may also closely watch the weekly jobless claims report to confirm if the improvement witnessed in the past week is sustained. The minutes of the FOMC meeting are expected to reveal deliberations among the members over how long interest rates should be kept accommodative and the need for additional quantitative measures to smoothen out the economic wrinkles.
At the same time, the consumer and producer price inflation reports for June, the Commerce Department's business inventories report for May and the Treasury Budget for June could also be parsed by traders, although they are not likely to have a significant impact on markets.
Market participants are expected to focus on the retail sales report to gauge the impact of stimulus spending and job cuts on consumer spending. Although most economists unequivocally support the theory that a rebound will materialize in the second half of 2009, there are still doubts over whether the recovery will carry over to 2010. The fate of consumer spending has a big role in making the recovery sustainable and an improvement in consumer spending in turn depends on whether the people decide to spend the tax cuts or save them.
Additionally, the production rebound anticipated in the second half of the year should be strong enough to improve conditions in the job market and result in job creation, stalling the job losses. The price of oil also has a key role to play in uplifting or denting consumer confidence, thereby impacting spending.
Industrial production may most likely decline again, although a rebound cannot be completely ruled out. Motor vehicle production should once again act as a drag, while general manufacturing conditions remain anemic too. Utility output is likely to have been impacted by milder weather that prevailed across most of the country. In line with recent improvement, the regional manufacturing surveys from New York and Philadelphia could show an improvement from the month-ago levels.
The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET on Monday. The budget is considered as an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $77.5 million for June.
The U.S. Labor Department is scheduled to release a report on the producer price index for June at 8:30 AM ET on the Tuesday. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index to show 0.8% growth and the core index to show 0.1% growth.
In May, producer prices rose 0.2% following a 0.3% increase in April, while the core producer price index edged down 0.1%. Economists had expected a 0.6% increase in producer prices and 0.1% increase in core producer prices.
Food prices fell 1.6% compared to a 1.5% increase in the previous month. Energy prices jumped 2.9% after edging down by 0.1% in the previous month. On a year-over-year basis, the producer price index fell an unadjusted 5%. Inflationary pressures in the pipeline seem to be building up, as intermediate food prices rose 1.3% and energy prices moved up 2%.
Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 AM ET on the same day. For June, economists estimate a 0.5% increase in the retail sales as well as the retail sales excluding autos.
Retail sales showed a notable increase in the month of May, although the increase was due in large part to an increase in gasoline prices that drove up sales at gas stations.
The report showed that retail sales rose 0.5% in May following a revised 0.2% decrease in April. Economists had expected sales to increased by 0.5% compared to the 0.4% decrease originally reported for the previous month.
The Commerce Department is scheduled to release its business inventories report for May at 10 AM ET on the same day. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 1% decline in business inventories for the month.
In April, business inventories dipped 1.1% month-over-month compared to the expected decline of 1%, with the drop spearheaded by a depletion of auto inventories. The March reading was revised down to a decline of 1.3%. Business sales fell by a lesser magnitude, dropping 0.3% month-over-month. Accordingly, the business inventories to sales ratio declined to 1.43.
The consumer price index for June is scheduled to be released at 8:30 AM ET on Wednesday. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The consensus estimates call for a 0.6% increase in the consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.
Consumer prices rose 0.1% in May after remaining unchanged in April. Core consumer prices, excluding food and energy, rose 0.1%, slower than the 0.3% increase in the previous month. The consensus estimates had called for 0.3% increase in the consumer price index and a 0.1% rise in the core consumer price index.
Annually, consumer prices were down 1.3%. Transportation prices rose 0.8% month-over-month and medical care costs rose 0.3%. On the other hand, food and beverage and housing prices declined 0.2% and 0.1%, respectively. Apparel prices also moved down by 0.2%. Costs of recreation remained unchanged.
The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 AM ET on the same day. The headline general business conditions index for July is expected to come in at -5.
Conditions for New York manufacturers have continued to deteriorate in the month of June, with the index of activity in the sector falling by much more than expected.
The New York Fed said its general business conditions index fell to a negative 9.41 in June from a negative 4.55 in May, with a negative reading indicating deterioration in conditions. Economists had expected the index to edge down to a negative 5.10.
The industrial production report of the Federal Reserve is due out at 9:15 AM ET on the same day. Economists estimate that industrial production declined 0.6% in June, while capacity utilization is expected to come in at 67.9%.
In May, industrial output dropped 1.1% month-over-month, almost in-line with the expected decrease of 1%. Auto output showed one of the steepest declines, falling 7.9%. The April reading was revised down by 0.2 percentage points. Capacity utilization was at 68.3%, marking another record low reading. The output of mines fell by 2.1%.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on the same day.
Crude oil stockpiles declined by 2.9 million barrels in the week ended July 3rd to 347.3 million barrels. Inventories of crude oil remained above the upper bound of the average range.
However, gasoline and distillate inventories increased by 1.9 million barrels and 3.7 million barrels, respectively. While gasoline stockpiles climbed into the upper half of the range, distillate inventories were above the upper boundary of the average range. Refinery capacity utilization averaged 86.7% over the four weeks ended July 3rd compared to 86.4% in the previous week.
The Federal Reserve is scheduled to release the minutes of its June 24th-25th meeting at 2 PM ET.
At its June meeting, the FOMC decided along the expected lines, opting to hold interest rates unchanged at 0%-0.25%. The central bank did not make any changes to its qualitative easing measures, instead suggesting that as previously announced, it will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed also will be buying up to $300 billion of Treasury securities by autumn.
On economic conditions, the central bank noted that the pace of contraction has been slowing. The Fed also observed that financial market conditions have improved. While constrained by job losses, lower housing wealth and tight credit, household spending has been showing signs of stabilization. The central bank said firms have been successful in bringing inventories in line with sales, although they are continuing to reduce fixed investment and workforce.
The FOMC expressed confidence that concerted policy actions will lead to the resumption of a sustainable recovery due to concerted policy actions. The committee also said it expects inflation to remain subdued for some time due to substantial resource slack.
The Labor Department is due to release its customary weekly jobless claims report for the week ended July 11th at 8:30 AM ET on Thursday.
First-time claims for unemployment benefits showed a substantial decrease in the week ended July 4th, with jobless claims falling below the 600,000 level for the first time since January.
The report showed that jobless claims fell to 565,000 from the previous week's revised figure of 617,000. Economists had been expecting a more modest decrease to 603,000 from the 614,000 originally reported for the previous week.
The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for June at 9 AM ET on the same day.
The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 AM ET on the same day. Economists expect the diffusion index of current activity to show a reading of -5 for July.
In June, the pace of contraction in manufacturing activity in the mid-Atlantic region slowed significantly, with the index of business activity coming in at -2.2 compared to -22.6 in May and the economists estimate of -17. The prices paid and prices received indexes improved, rising to -13 and -16.6, respectively. The new orders index also saw a significant improvement, with the index moving up about 21 points to -4.8, while the shipments index climbed 21 points to 2.1.
On the employment front, there was improvement as well, albeit on a moderate degree. On a more upbeat note, the 6-month outlook index rose to 60.1 from 47.5 in the previous month, reaching the highest level since September 2003.
The National Association of Homebuilders' is scheduled to release the results of their survey on homebuilders' confidence at 1 PM ET on the same day.
The housing market index fell by 1 point to 15 in June, reflecting the caution of homebuilders due to their concerns over a fragile state of the housing market. The index of current home sales and the index gauging traffic of prospective buyers remained unchanged at 14 and 13, respectively, while the index gauging expectations for the next six months fell 1 point to 26.
A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which is the number of permits issued for new housing units each month, is slated to be released at 8:30 AM ET on Friday. Economists estimate housing starts of 530,000 for June.
Housing starts rose 17.2% month-over-month to 532,000 in May from a downwardly revised reading of 454,000 for April. Economists had expected housing starts to have increased to 485,000 from the initially estimated reading of 458,000 for April.
Single-family starts rose 7.5%, while starts of buildings with five units or more were 124,000. Annually, housing starts slumped 45.2%. Building permits rose 4% month-over-month to 518,000.
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